EQT Corporation — Q1 2014 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2014, compared with the three months ended March 31, 2013. EQT operates EQT Production, focused on Appalachian Basin natural gas, NGLs and limited oil production, and EQT Midstream, which provides gathering, transmission, storage and marketing services. Equitable Gas and Homeworks were sold in December 2013; their results are presented as discontinued operations in both periods. Unless stated otherwise, financial amounts below are in millions of dollars.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 | Change / context |
|---|---|---|---|
| Operating revenues | $661.6 | $415.9 | Up 59.1% |
| Operating income | $356.8 | $144.5 | Up 146.9%; operating margin was approximately 53.9% versus 34.7% |
| Income from continuing operations attributable to EQT | $192.3 | $65.2 | Diluted EPS of $1.26 versus $0.43 |
| Net income attributable to EQT | $192.2 | $100.3 | Prior period included $35.0 of discontinued-operations income |
| Interest expense | $32.0 | $37.8 | Down $5.8, primarily from higher capitalized interest |
| Income tax expense / effective rate | $116.3 / 35.5% | $34.8 / 31.9% | Higher pre-tax income and state taxes/reserves |
| Cash from operating activities | $461.6 | $299.3 | Up $162.3 |
| Capital expenditures | $492.1 | $292.7 | Up $199.4; operating cash flow was below capex by $30.5 |
Balance sheet and liquidity at March 31, 2014. Cash and cash equivalents were $909.8, current assets $1,370.2, and current liabilities $758.4, for working capital of approximately $611.8. Long-term debt was $2,486.9, with $11.1 current portion and $110.0 of short-term Partnership loans. Total debt on these balance-sheet lines was approximately $2,608.0. EQT had no borrowings under its $1.5 billion revolving facility; EQT Midstream Partners had $110 million outstanding under its expanded $750 million facility. Both facilities mature in February 2019. The Company and Partnership reported compliance with their respective covenants.
Material changes and operating performance
- Production sales volumes increased 29.9% to 106.1 Bcfe, with Marcellus volumes up 49.9%. EQT Production operating income rose to $277.2 from $74.1, driven by higher volumes and a 44% increase in its effective sales price to $4.40/Mcfe.
- EQT Corporation’s average effective sales price was $5.34/Mcfe, up 28%. A 48% higher average NYMEX gas price and sales into high-priced markets during an unusually cold winter contributed. Using transportation capacity to reach those markets generated approximately $96 million of higher revenue versus Q1 2013.
- Hedge effects were unfavorable: the reported hedge impact was a $59.2 million loss versus a $43.5 million gain in Q1 2013; hedge ineffectiveness contributed a $22.4 million loss. Appalachian basis was also weaker.
- EQT Midstream operating income increased 11.9% to $83.1. Gathered volumes rose 24.6% and pipeline throughput increased 78.3%; higher transmission and gathering revenues were partly offset by higher operating costs.
- Net income attributable to noncontrolling interests increased to $18.7 from $9.0, mainly reflecting higher Partnership capacity reservation revenue and the impact of its 2013 public unit offering.
- Cash increased $64.2 during the quarter. Investing cash outflow was $492.1; financing provided $94.7, including $110.0 of Partnership short-term borrowing. The prior-year comparison is affected by the discontinued-operations recast and the $35.0 discontinued-operations profit in Q1 2013.
Outlook, risks and contingencies
- Management expected approximately $2.5 billion of 2014 capital investment, excluding acquisitions: about $1.9 billion for well development and $0.6 billion for midstream infrastructure. Funding was expected from cash on hand, operating cash flow and midstream asset sales to the Partnership.
- 2014 production sales volumes were expected at 465–480 Bcfe, implying approximately 25% growth; expected NGL volumes were 6.8–6.9 million barrels. The drilling plan called for approximately 357 gross wells. Further drilling on Ohio Utica acreage was deferred after completing and evaluating five wells drilled in 2013.
- Management expected Appalachian basis discounts to continue because of regional gas supply. Commodity prices, basis differentials, production execution, infrastructure timing and funding needs remain important uncertainties. Management cautioned that interim results are not necessarily indicative of full-year results.
- The Company hedges commodity exposure; open cash-flow hedge positions covered 352 Bcf at quarter-end and matured through December 2017. A hypothetical 10% gas-price decrease would increase derivative fair value by approximately $139.9 million, while a 10% increase would decrease it by approximately $140.0 million; these sensitivities exclude the offsetting effect on physical gas sales.
- Senior debt ratings were Baa3 (Moody’s), BBB (S&P) and BBB- (Fitch), all with stable outlooks. A downgrade, particularly below investment grade, could raise borrowing costs and collateral requirements. The Company reported no required additional collateral under derivative credit provisions at quarter-end.
- Various legal and regulatory matters were pending; management did not expect current matters to materially affect financial position, results or liquidity. A Pennsylvania environmental matter related to a 2012 water release was in settlement discussions; resolution could result in sanctions of $100,000 or more. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether reported production growth, realized prices and unusually favorable winter-market access are sustainable, and how continued Appalachian basis weakness affects realized prices.
- How the $2.5 billion capital program is funded and delivered, including expected volumes, infrastructure additions and any planned midstream asset dropdowns.
- Underlying cash generation after capital spending, Partnership borrowing and future financing needs.
- Hedge coverage, hedge ineffectiveness and derivative exposure; confirm the effect of price and basis movements alongside physical sales.
- Progress and potential cost of the Pennsylvania environmental matter, as well as any material post-closing adjustments from the Equitable Gas transaction.